Is Sydney really at risk of a property bubble bursting?

Brace yourself. After a surge in prices over the past five years, Sydney is facing a ‘housing bubble’ according to UBS Wealth Management’s latest Global Real Estate Bubble Index

However, if I’ve read one property bubble story I’ve read a hundred. The media has been full of talk about whether the Australian property market is significantly overpriced and due for a significant correction for years.

But are they right this time?

Are we in for a property market collapse?

The simple answer is no – property values are not about to collapse!

Sure, house prices are high compared to many parts of the world, but rising prices per se don’t cause a bubble.

Property values will correct in the future but our property markets have been rising and falling for centuries and there has never been a “collapse” of Australian capital property values in modern times.

You see, what is needed for a bubble to occur is for the rises to be fuelled by increased borrowings – leverage – which makes the banking system fragile and unstable and of course the implication of a bubble is that it will burst and prices will collapse.

The UBS report analyses residential property prices in 18 major financial centres and has created an index the bank says is “designed to track the risk of housing bubbles in global financial centres”.

The latest report included six cities in its bubble zone: Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong.

It found house prices in the cities within the bubble risk zone have increased by almost 50% on average since 2011, while outside of those six bubble zone cities, prices have risen by less than 15%.

UBS said Sydney’s housing market has been overheating since the city became a target for Chinese investors several years ago, with housing prices, adjusted for inflation, peaking in 2015 after a 45% rise since mid-2012.

“Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly,” the report noted.

However, there’s no need for the kind of concern about a housing crash that was seen in the US a decade ago, according to Jon Woloshin, a strategist at UBS Wealth Management.

Here’s why I think property values are not going to collapse

Remember, for a property market to crash you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them.

To make our property markets crash – and that’s different to price growth slowing or the normal cyclical correction – we need one or more of the following four things:

• A major depression (not just a recession). Nobody with any economic credibility is suggesting this will occur in Australia in the near future;
• Massive unemployment and people not able to keep paying their mortgages. This is unlikely to occur with our relatively strong economy creating new jobs and Sydney punching above its weight in the percentage of jobs created;
• Exceedingly high interest rates so that homeowners won’t be able to keep up their mortgage payments. Again this isn’t on the horizon; and
• An excessive oversupply of properties and no one wanting to buy them. Other than in a few spots inner city high rise markets, this is not occurring in Australia.

A local opinion

George Raptis, director of Metropole Property Strategists in Sydney agrees there is no cause for alarm:

“It’s true that Sydney property prices are high but that doesn’t mean they’re going to crash, which seems to be what many potential buyers who missed out over the past few years are secretly hoping for.

“Remember – Sydney is an international coastal city, that deserves a premium price for its lifestyle as well as its amenities.

“The Sydney property market has performed strongly over the past four years, but this has been underpinned by strong jobs growth with Sydney producing close to half our jobs over the last year, strong population growth and also a relative undersupply of properties.

“The economic fundamentals of Sydney still stack up so the chances of a “bust” seem minimal at best and historically have actually never happened in any of our major capital cities.” says Raptis

“While I believe that there is unlikely to be any significant fall in price in most parts of our most populous city, there are some concerns about the oversupply of properties that is looming in certain locations of Sydney. That’s why I’d be very, very careful and avoid buying: off-the-plan properties; new properties in the large developments; and established properties close to those locations where an oversupply new projects is looming.

Does all this mean investor should avoid the Sydney property market?

First of all there is not “one” Sydney property market – there are different markets based on geography, price points and type of property.

So rather than avoiding investing in Australia’s largest property market, I’d be carefully selecting “investment grade” properties in selected segments of the Sydney market.

I’d look for established properties with a “twist” and a level of scarcity in affluent, gentrifying, inner and middle ring suburbs where there is no looming oversupply, and in suburbs where the supply /demand ratio is still causing prices to increase.

Then I’d be holding these properties for the long term, recognising that Sydney’s population and economic growth will underpin properties prices.

But if history repeats itself, smart investors and homebuyers will be out buying the right type of property, while others will be more cautious and sit on the sidelines waiting to see how things pan out. While this may seem safe to them, they are likely to miss out on some great opportunities.

It is easy to do nothing. As Donald Trump says: “Nothing is easy… but who wants nothing.”

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.